The Funny Thing About Newspaper Stocks

by Jonathan Berr | July 30, 2013 7:00 am

If someone would have told you at the beginning of the year that shares of Apple (AAPL[1]) — at one point the symbol of all that is hip and cool — would be underperforming some of the nation’s leading newspaper stocks, which to some represent all that is outdated and irrelevant … you probably would have wondered whether they were smoking an illicit substance.

That certainly would have been my reaction.

But dear readers, the world has gone mad. The maker of the iPad and iPhone has struggled to meet Wall Street’s lofty expectations and has posted a 17% decline, even after its post-earnings bump[2].

Newspaper stocks, meanwhile, have the opposite issue. Expectations for their performance are so low that they are easily meeting them. Indeed, the more people deride newspapers as “irrelevant” or destined for the scrapheap, the better the industry’s stocks perform. Keep in mind that some of these stocks are cheap — under $5 — so small price movements lead to huge percentage gains.

There are a number of reasons why the industry hasn’t gone down the tubes as quickly as some had expected, though four in particular stand out to me:

Warren Buffett: Last year, the Oracle of Omaha went on an acquisition binge[3], snapping up 63 publications from Media General (MEG[4]) for $142 million. He has also acquired other names, including his hometown Omaha World-Herald. The Buffett effect can’t be underestimated. Shares of Lee Enterprises (LEE[5]) — the parent of the St. Louis Post-Dispatch — have surged more than 160% this year as many on Wall Street expected Buffett to acquire the Davenport, Iowa, company, where he has been a shareholder for years. The appeal is obvious since Lee’s holdings are mostly in second-tier holdings, where competition for readers is less intense. Some investors seems to agree with Buffett that these stocks are too cheap to ignore.

Paywalls: Count me among the skeptics regarding newspapers’ efforts to get readers to pay for content that they once got for free. I was wrong. Paywalls are working quite well. McClatchy (MNI[6]) — whose papers include the Miami Herald and Sacramento Bee — has gained more than 85% this year. During its latest quarter, the Sacramento, Calif.-based company reported a 10.6% gain in digital-only revenue. The New York Times Co. (NYT[7]) has also benefited from this trend. At the end of the last quarter, the company had about 708,000 paid digital subscriptions, an increase of 45% on a year-over-year basis. Its shares have surged more than 39%.

Diversification: Some companies such as Gannett (GCI[8]) are expanding their horizons beyond print. The publisher of USA Today agreed to acquire local television station owner[9] Belo Corp. for $2.2 billion. Shares of the Virginia-based company have spiked 42%. Milwaukee Journal Sentinel owner Journal Communications (JRN[10]) has done even better jumping more than 70%. It owns 35 radio stations and 15 television stations in 12 states. E.W. Scripps (SSP[11]) owns more than a dozen stations in addition to papers such as Memphis’ Commercial Appeal.

Less Bad: Remember all of the rumors about the planned sale of the Tribune papers? Well, the company eventually decided to spin them off[12] after finding the offers for its titles, such as the Los Angeles Times, to be lackluster. Time Warner (TWX[13]) is also spinning off its Time magazine business, while Rupert Murdoch jettisoned his News Corp (NWSA[14]) holdings — such as the Wall Street Journal — into a separate company. One thing that all these deals have in common is a hope that investors will find out that things aren’t as bad as they have been.

Total industry revenue dropped 2% last year to $38.6 billion, according to data from the Newspaper Association of America[15]. That’s not great, obviously, but its not wretched either. About 49% of that revenue — $18.9 billion — came from print advertising, an improvement from 52% a year earlier.

The sector is full of surprises for an industry that everyone thought would be “dead” by now, but considering these newspaper stocks’ run-ups, investors need to be picky.

The two to stay away from is The New York Times Co. since the Sulzberger family, which controls the company, has shown little regard for shareholders that aren’t part of the family over the years. The same holds true for The Washington Post Co. (WPO[16]), which is controlled by CEO Donald Graham’s family.

For that matter, I also would take a pass on the Tribune’s papers when they are spun out because they are big-city metros with loads of competitors, and the same holds for McClatchy.

Lee is worth a gamble because of the Buffett connection. The stock trades at less than $5 and has a price-to-earnings multiple of about 3, so there is very little risk. Moreover, the company has slashed its debt since January by $122 million. Journal Communications also is attractively valued even with a much larger multiple of 14; its broadcast properties will make it a tempting takeover target for a larger rival.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @jdberr.